If you are not comfortable investing in commodities, where one can take bets mostly through futures, investing in a ‘related’ commodity stock can be a good option. Data show that commodity price movements have a multiplier effect on related stocks. This means if a commodity moves up by, say, 10%, the stock of the company engaged in manufacturing or processing it rises by more than 10%.

This is because while the production cost remains the same, revenues rise (due to high commodity prices), increasing the operating profit (revenue minus cost), which in turn pushes up the stock price.

“Earnings of metal companies have a 1.5-1.8x sensitivity to metal prices,” says Kishore Narne, associate director and head, commodity and currency, Motilal Oswal Commodities, says,

The commodity stocks we are talking about could be that of a mining or manufacturing company such as Tata Steel and Steel Authority of India Ltd (steel makers), Sesa Goa (iron ore mining), Hindalco, Nalco and Sterlite (aluminium mining), Cairn India and ONGC (oil & gas exploration).